Is HTC Purenergy (CVE:HTC) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies HTC Purenergy Inc. (CVE:HTC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for HTC Purenergy

How Much Debt Does HTC Purenergy Carry?

The image below, which you can click on for greater detail, shows that at September 2021 HTC Purenergy had debt of CA$5.88m, up from CA$5.24m in one year. However, because it has a cash reserve of CA$156.3k, its net debt is less, at about CA$5.72m.

How Healthy Is HTC Purenergy's Balance Sheet?

According to the last reported balance sheet, HTC Purenergy had liabilities of CA$3.72m due within 12 months, and liabilities of CA$6.06m due beyond 12 months. Offsetting this, it had CA$156.3k in cash and CA$99.8k in receivables that were due within 12 months. So it has liabilities totalling CA$9.53m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$4.14m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, HTC Purenergy would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HTC Purenergy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that HTC Purenergy can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, HTC Purenergy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$18m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CA$35m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for HTC Purenergy you should be aware of, and 3 of them are a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.